What's a short sale?

A short sale is a useful technique to use when you owe more on your house than it's worth. To illustrate, let's say you owe $200,000 on a house that would only sell for $160,000. Under normal circumstances, there wouldn't be much you could do, because you would end up owing the bank $40,000.

However the bank may be willing to allow you to sell the house for less than it is owed. This is referred to as: "selling short".

The reason this works is that the bank (lender) stands to lose a lot of money by foreclosing on your house. In order to foreclose, the bank will incur lawyer's fees and foreclosure fees. Once it gets possession of the house it'll have: repairs, maintenance, insurance, utilities fees. Finally, there'll be staging fees to make the house presentable and real estate commissions to sell the house.

All together on a typical home they would stand to lose upwards of $50,000. On top of that, it'll take them months to take possession of the house and then possibly many more months to sell the house, so they are willing to consider any solutions you may come up with.

In the situation listed above, the lender could take the $40,000 loss and still come out $10,000 ahead and with a lot less hassle.

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